accounting for business students

ACCOUNTINGFOR BUSINESS

STUDENTS

A T R I L L ’ S

ATRILL • McLANEY • HARVEY

ACCOUNTINGFOR BUSINESS

STUDENTS

A T R I L L ’ S

ATRILL • McLANEY • HARVEY

ACCOUNTING FOR BUSINESS STUDENTSvi

About the Australian author xii

Preface xiii

About the contributor xvii

Acknowledgements xviii

For students: How do I use this book? xx

Resources for students and educators xxii

CHAPTER 1

Introduction to accounting 1

Nature and role of accounting 3Accounting as a service function 4Costs and benefits of accounting information 5Accounting as an information system 6

Users of accounting information 8Financial and management

accounting 9What is the financial objective of a business? 11

Stakeholder theory 13Balancing risk and return 14

The main financial reports—an overview 15Financial accounting 15Management accounting 18

Business and accounting 20What kinds of business ownership exist? 20How are businesses managed? 25Not-for-profit organisations 26

The changing face of business and accounting 28Ethics and ethical behaviour in business 30

How useful is accounting information? 33Why do I need to know anything about accounting

and finance? 34The ALTC’s Academic Standards

for Accounting 35Characteristics of successful business people 37

Summary 38Reference 39Discussion questions 39Case study 41Solutions to activities 42

CHAPTER 2

Measuring and reporting financial position 46

Nature and purpose of the statement of financial position 47

Assets 47Claims against the assets 48

The accounting equation 50The effect of trading operations on the statement

of financial position 52The classification of assets and claims 55

The classification of assets 55The classification of liabilities 56The classification of owners’ equity 57

Formats for statements of financial position 58Financial position at a point in time 61

Factors influencing the form and content of the financial reports 62

Conventional accounting practice 63Valuing assets 67

Usefulness of the statement of financial position 72Statement of financial position deficiencies 74

Summary 77Discussion questions 78Application exercises 79Case study 87Solutions to activities 88

CHAPTER 3

Measuring and reporting financial performance 92

The statement of financial performance—its nature and purpose, and its relationship with the statement of financial position 93

The stock approach to calculating profit 95The format of the income statement 97

Key terms 97Classifying expenses 99The reporting period 101

CONTENTS

viiCONTENTS

Profit measurement and the recognition of revenues and expenses 102

Recognition of revenues 102Recognition of expenses 106Profit, cash and accruals accounting—a review 110

Profit measurement and the calculation of depreciation 111

Calculating depreciation 112Selecting a depreciation method 118Impairment and depreciation 119Depreciation and the replacement of fixed assets 119Depreciation and judgement 119

Profit measurement and the valuation of inventory 120

What is inventory? 120What is the cost of inventory? 120What is the basis for transferring the inventory

cost to cost of sales? 121The net realisable value of inventory 125

Profit measurement and the problem of bad and doubtful debts 127

The traditional approach 127The impairment of assets approach 129

A first-principles approach 131Uses and usefulness of the income statement 137


CHAPTER 4

Recording transactions—the journal and ledger accounts 162

The recording process—an overview 163Double-entry bookkeeping 167

Ledger—detailed method of recording 168The trial balance 177Closing off the accounts 179Period-end adjustments 183

Prepayments and accruals 183Revenues due and prepaid 184Depreciation 185Bad and doubtful debts 187Inventory 189

Manufacturing and trading accounts 191Adjusted trial balance and worksheet 195The chart of accounts 199


CHAPTER 5

Accounting systems and internal control 227

What is internal control? 228Internal control in practice 230Internal control and e-commerce 232Why doesn’t internal control always work? 233Illustration of a functional area of a business

and its internal control 234The ledger and subsidiary records 238

Divisions of the ledger 239Subsidiary records—a traditional manual system 239

The sales and purchases journals 240The cash book and cash journals 243The journal 247Control accounts and reconciliations 249

Control accounts 249Reconciliation statements 250

Computerised accounting systems 255Cloud computing 256


ACCOUNTING FOR BUSINESS STUDENTSviii

CHAPTER 6

Introduction to limited companies 280

The main features of companies 281Legal nature 281Unlimited (perpetual) life 281Limited liability 282Legal safeguards 282Public and proprietary (private) companies 283Transferring share ownership—the role of the

stock exchange 284Separation of ownership and management 284Extensive regulation 285Advantages and disadvantages of the company

entity structure 288Equity and borrowings in a company context 289

Equity/capital (owners’ claim) of limited companies 289Reserves 292Bonus shares 293Raising share capital 294Borrowings 298

Restrictions on the rights of shareholders to make drawings or reductions of capital 299

The main financial statements 303The income statement 304The statement of financial position 305Dividends 305

Accounting for groups of companies 307


CHAPTER 7

Regulatory framework for companies 326

The directors’ duty to account—the role of company law (Corporations Act) 327

Auditors 328

The need for accounting rules 331The role of accounting standards in

company accounting 331International accounting standards 332The conceptual framework 334

The role of the Australian Securities Exchange (ASX) in company accounting 337

Corporate governance 338Presentation of published financial statements 344

Statement of financial position 344Statement of comprehensive income 345Statement of changes in equity 350Statement of cash flows 352Notes 352General points 352

Segmental financial reports 353Segmental reporting rules 354Segmental disclosure 354Segmental reporting problems 356

Creative accounting 358Creative accounting methods 358Checking for creative accounting 361Creative accounting and economic growth 361


CHAPTER 8

Measuring and reporting cash flows 376

The importance of cash and cash flow 378Differences between the four external financial reports 381

The statement of cash flows 382Preparation of the statement of cash

flows—a simple example 386Deducing cash flows from operating activities 388Deducing cash flows from investing activities 390Deducing cash flows from financing activities 391

ixCONTENTS

Reconciling profit for the year with cash from operating activities 396

Some complexities in statement preparation 400The investing section 401The financing section 402

What does the statement of cash flows tell us? 404


CHAPTER 9

Corporate social responsibility and sustainability accounting 430

Social issues in accounting 431General background 431Stakeholder concept 431What is social responsibility? 433

Corporate social responsibility (CSR)— what does it mean? 436

Accounting for corporate social responsibilities 440Triple bottom line reporting 442The Global Reporting Initiative (GRI) 444

General background 444Background and development of the GRI Guidelines 444Current position—the GRI Standards 446Integrated reporting 455

The balanced scorecard approach 457The financial perspective 457The business process perspective 458The customer perspective 458The learning and growth perspective 458

Overall conclusion 461

Summary 462References 462Discussion questions 463Application exercises 464Case study 467Solutions to activities 470

CHAPTER 10

Analysis and interpretation of financial statements 472

Financial ratios 473Financial ratio classification 473The need for comparison 474The key steps in financial ratio analysis 475The ratios calculated 475A brief overview 478

Profitability ratios 479Return on ordinary shareholders’ funds (ROSF)

(also known as return on equity (ROE)) 479Return on capital employed (ROCE) 480Operating profit margin 481Gross profit margin 481

Efficiency ratios 483Average inventories turnover period 483Average settlement period for accounts

receivable (debtors) 484Average settlement period for accounts

payable (creditors) 485Sales revenue to capital employed 486Sales revenue per employee 486Alternative formats 486The relationship between profitability and efficiency 487

Liquidity 489Current ratio 489Acid test ratio 490Cash flows from operations ratio 490

Financial gearing (leverage) ratios 491Gearing ratio 494Interest cover ratio (times interest earned) 494An aside on personal debt 496

Investment ratios 497Dividends per share ratio 497Dividend payout ratio 498Dividend yield ratio 498Earnings per share ratio 499Operating cash flow per share 500Price/earnings ratio 500

ACCOUNTING FOR BUSINESS STUDENTSx

Issues relating to financial analysis 502Financial ratios and the problem of overtrading 502Trend analysis 503Index or percentage analysis 506Ratios and prediction models 507Limitations of ratio analysis 511


CHAPTER 11

Cost–volume–profit analysis and relevant costing 534

The behaviour of costs 535Fixed costs 535Variable costs 536Semi-fixed (semi-variable) costs 537

Break-even analysis 540Contribution 543

Profit–volume charts 545Margin of safety and operating gearing 546Weaknesses of break-even analysis 548

Use of spreadsheets 551Expected costs rather than historic costs 554More complex cost and revenue behaviour patterns 555

Relevant cost, outlay cost and opportunity cost 556

Marginal analysis/relevant costing 559Accepting/rejecting special contracts 560The most efficient use of scarce resources 560Make or buy decisions 561Closing or continuing a section or department 562


CHAPTER 12

Full costing 582

The nature of full costing 583Deriving full costs in a single or multi-product

or service operation 584Single-product businesses 584Multi-product operations 585

Segmenting the overheads 594Dealing with overheads on a departmental

(cost centre) basis 594Batch costing 601The forward-looking nature of full costing 602

Activity-based costing (ABC) 603Costing and pricing: the traditional way 603Costing and pricing: the new environment 603An alternative approach to full costing 604ABC contrasted with the traditional approach 605Attributing overheads 606Benefits of ABC 607Criticisms of ABC 610

Uses of full (absorption) cost information 611Full cost (cost-plus) pricing 612Criticisms of full costing 613


CHAPTER 13

Planning and budgeting 634

Planning and control 635Corporate objectives, long-term plans

and budgets—their relationship 635Exercising control 636

The role of projected financial statements 637Likely information needed for forecast statements 638

xiCONTENTS

Projected financial statements 640Alternative form of statement of cash flows

for forecasting 642Evaluation of projected statements 643Sensitivity analysis 645Projections using spreadsheets 645Importance of forecasting 646

Budgets and forecasts 649Time horizons of plans and budgets 649Limiting factors 650The interrelationship of various budgets 650The budget-setting process 651Incremental and zero-based budgeting 652The uses of budgets 653Non-financial measures in budgeting 655The extent to which budgets are prepared 655

Preparing the cash budget 656Preparing other budgets 659Using budgets for control 662

Comparing the actual performance with the budget 662Flexing the budget 663Variance analysis—more detail 665Standard quantities and costs 668Reasons for adverse variances 668Investigating variances 669Necessary conditions for effective budgetary control 671

Limitations of the traditional approach to control 672

General limitations concerning budgeting systems 672Behavioural aspects of budgetary control 672Beyond Budgeting 674Overall review 677


CHAPTER 14

Capital investment decisions 705

Features of investment decisions and associated appraisal methods 706

The nature of investment decisions 706Methods of investment appraisal 707

Accounting rate of return (ARR) 709ARR and ROCE 709Problems with ARR 710

Payback period (PP) 712Problems with PP 713

Net present value (NPV) 714Interest lost 715Inflation 715Risk 715Actions of a logical investor 716Using discount (present value) tables 718The discount rate and the cost of capital 719Why NPV is superior to ARR and PP 720Discounted payback 720

Internal rate of return (IRR) 721Problems with IRR—a comparison between NPV and IRR 725

Some practical points 728The basis of the cash flow calculations 728More practical points 732

Investment appraisal in practice 734Methods used 734Investment appraisal and planning systems 735Risk and uncertainty 738

Summary 739References 740Discussion questions 741Application exercises 742Case study 751Solutions to activities 753Appendix 14.1 757

Glossary 759

Index 767

ACCOUNTING FOR BUSINESS STUDENTSxii

Emeritus Professor David HarveyAfter qualifying as an accountant in the United Kingdom, David began lecturing in 1971 at Portsmouth Polytechnic (now Portsmouth University) with a subsequent move to Plymouth Polytechnic (now the University of Plymouth) in 1977. During his time in the United Kingdom he developed a keen interest in curriculum development and teaching methods and was involved with the writing of several books with an open learning style, many of these in collaboration with Peter Atrill and Eddie McLaney. During this time he also completed a Masters degree in Managerial Financial Controls and a PhD in the areas of investment and financing decisions. This research work covered both traditional investment appraisal and corporate strategy.

In 1991 he moved to Australia to take up the position of Professor of Accounting and Head of the Centre for Accounting and Finance at the University of New England (Northern Rivers), which subsequently became Southern Cross University. In 1992 he became the Dean of the Faculty of Business and Computing, a position he held until 1996, before reverting to his Professorship. In 2000 he took up the position of the Dean of the Faculty of Commerce at the University of Southern Queensland. In 2001 the Faculty of Commerce was merged with the Faculty of Business and David became Dean of the enlarged Faculty of Business. David has had extensive experience in developing and teaching programs internationally. His most recent position was as Pro Vice-Chancellor (International Quality), a position he held from 2004 until his retirement in 2005.

ABOUT THE AUSTRALIAN AUTHOR

xiiiPREFACE

This new textbook is primarily targeted at undergraduate and postgraduate students of business-oriented programs who want a fairly comprehensive introduction to accounting.

The book aims to provide engaging and relevant content, something which we regard as critical to success for today’s learners.

This first-edition textbook is the result of considerable review activity with user groups. The end product is a book which was designed for courses that require learners to be both preparers and users of financial statements. Courses of this nature require a balanced approach that is relevant to both students majoring in accounting and students of business generally. This book therefore aims to provide a comprehensive first course in accounting which will support students who wish to go on to an accounting major, and also those who plan to do other majors, or are studying general business.

A critical part of this is use of a first-principles approach to accounting, from which we can then move on to the actual recording process. This avoids creating the misconception that accounting is a mechanical process; rather it enables us to focus more on the importance of critical thinking and decision making. The inclusion of two chapters on what is essentially record keeping aims to provide students with a deeper understanding of how financial information is collected and communicated, while also identifying its limitations.

The emphasis of the book is clearly decision making. It uses a problem-solving approach and focuses on real-world business situations. A key objective throughout is to assist in the development of generic skills, including communication, teamwork, critical thinking, problem-based learning, ethics, self-management, planning and organisation. The book provides a range of activities which should help in the development of these generic qualities.

BackgroundThis book has its origins in Accounting: An Introduction, which has been through six editions, and which has been regularly reviewed and improved. This book will in future be published as Accounting for Non-Specialists. However, after considerable market research, it was agreed that the sixth edition, while more clearly targeting the non-specialist

market, was not satisfying all market needs. As a result, Accounting for Business was developed. This book builds on the eighth edition of a second British book by Peter Atrill and Eddie McLaney, namely, Accounting and Finance: An Introduction, and uses a considerable part of it.

Quite a lot of the coverage of Accounting for Business is common with the non-specialist book. However, it expands the content of most chapters, in order to provide a more comprehensive underpinning for all business students, and specifically for those who want to go on to an accounting major. Also, there has been a significant demand for content relating to the recording system, so two chapters have been added, covering journals and ledger accounts, and internal control and accounting systems in practice. In order to make room for the additional material, two chapters on finance, which are in the non-specialist book, have been omitted from the new textbook. The style of both books is very similar.

It is worth noting that the two British books which underpin this book, namely Accounting and Finance for Non-Specialists and Accounting and Finance: An Introduction, are in their tenth and eighth editions respectively. These books reflect many years of development in the UK, and share content where appropriate. In Accounting for Business, we have tried to ensure that the content reflects Australian needs and conditions, while also adding some new features. We have been working together on our Australian non-specialist book for many years and this is now in its seventh edition. Collaboration of this type has helped with the development of an international perspective on a range of issues which should provide benefit to students.

Features

▶ Interspersed throughout each chapter are numerous activities, with at least one for every learning objective. These are relatively short ‘quick-fire’ questions of a type a lecturer might pose to students during a lecture or tutorial, and are intended to serve two purposes: to give readers the opportunity to check that they have understood the preceding section, and to encourage them to think beyond the immediate topic and make linkages to topics either previously covered or covered in the next section. An answer to each activity is

PREFACE

ACCOUNTING FOR BUSINESS STUDENTSxiv

provided at the end of the chapter, to which readers should refer only after they have attempted the activity.

▶ At the end of each section, which covers a specific learning objective, there are several concept check questions. These are short multiple-choice questions which aim to provide you with a quick check of your understanding of the learning objective/section. The answers are at the end of the chapter.

▶ Towards the end of each chapter, but also at an appropriate point in some chapters, there is a self-assessment question or questions. These are much more demanding and comprehensive than the activities, in terms of both the breadth and the depth of the material they cover. As with the activities, it is important to make a thorough attempt at each question before referring to the solution. Solutions to these questions are available online.

▶ Discussion questions occur at the end of each chapter. These are relatively short, typically require a descriptive or analytical answer, and are intended to enable readers to assess their recollection and critical evaluation of the main principles in each chapter. They might be used as the basis for tutorial discussion.

▶ Application exercises are also positioned at the end of most chapters and these have been categorised as easy, intermediate or challenging. These are usually of a numerical type, and are designed to enable readers to further apply and consolidate their understanding of topics. A single case study can also be found at the end of each chapter. Some of these are simply more complicated problems, but in the main they are questions based on current issues. Their aim is to get students to think in a broader manner than usual, and to develop a wider approach to dealing with issues that are real and current.

▶ This new book continues to include what we have called ‘Real World’ examples (typically three or four per chapter), which aim to provide a link between theory and current practice. Following each Real World example is a set of classroom discussion

points, which should facilitate discussion on issues that have occurred in business relatively recently.

▶ Each chapter has an ‘Accounting and You’ section, which aims to relate the content of the chapter to the individual student reader. All too often students feel that the content is big-business oriented and has nothing really to do with them. This section illustrates that what they are learning has real relevance to their everyday lives. Each of these also has a series of classroom discussion points for the class to ponder.

Coverage and structureAlthough the topics included are, to some extent, relatively conventional, the coverage and treatment of material is designed to meet the needs of business students. While the emphasis is primarily on underlying concepts, and the application and interpretation of information for decision making, this book also includes sections on data collection and recording, as well as the preparation of statements and reports.

One major difference between this book and many others relates to its early structure. As business and accounting become more complicated it becomes more difficult to cover these issues in a reasonably straightforward way. So, in this book we introduce (in Chapters 2 and 3) two of the major accounting statements in the context of relatively simple business organisations, mainly sole proprietorships and partnerships or very simple companies. We use the balance-sheet approach to enable us to build up a balance sheet from a set of basic transactions, and then extend this approach by explaining the income statement as part of the equity section of the balance sheet. This is all done using a first-principles approach.

The approach used in Chapters 2 and 3 enables us to cover the basic accounting statements without adding the complications of a complex corporate regulatory framework. Once the underlying principles and nature of the statement of financial position (the balance sheet) and the statement of financial performance (the income statement) have been understood, we can then complicate it by adding (Chapters 6 and 7) companies and their regulatory framework.

xvPREFACE

In Chapters 4 and 5, we show how the two main statements are built up in practice, using a system of ledger accounts and books of original entry (or, as is more likely, by a computerised accounting system using the same basic principles).

We have ordered the chapters and their component topics to reflect what we consider to be a logical sequence. For this reason, we advise readers to work through the text in the order presented, particularly since we have been careful to ensure that earlier chapters do not refer to concepts or terms that are not covered until a later chapter.

Chapters 1–10 can be said to be broadly financial-accounting oriented, while Chapters 11–14 focus on what are clearly management accounting areas. Having said this, much of the financial accounting material effectively underpins the later chapters and students should not get too hung up on which area is which. For example, the financial accounting framework links very closely with the planning section in Chapter 13.

Chapter 1 provides a general introduction to the scope, purpose and interrelationships of the text’s core coverage—financial accounting and management accounting—together with a brief overview of the main financial statements. It also examines user groups and their needs; introduces the main types of business organisation, together with the way in which a business is typically organised and managed and identifies ways in which business and accounting have been changing over time. This chapter includes more on stakeholder theory, ethics and ethical behaviour in business, and the Academic Standards Statement for Accounting, than does the non-specialist book.

Chapter 2 explains the nature and purpose of the statement of financial position. This is done in the context of relatively simple organisations, so as to not unnecessarily complicate things. The method in which the statement is built up and its typical format are both covered, followed by the main factors that influence the content and values in the statement. Finally, the main uses and limitations of the statement are examined.

Chapter 3 explains the nature and purpose of a statement of financial performance, usually referred to as an income statement. The way in which the statement is built up and the way in which it is typically presented

are covered comprehensively, for relatively simple organisations. Extra material, compared with the non-specialist book, includes the unit-of-production method of depreciation and more on the perpetual inventory system.

Chapter 4 provides the student with an introduction to double-entry book keeping, including the link with the first-principles approach, ledger accounts, use of trial balance, the closing-down process and a series of period-end adjustments. It also introduces the adjusted trial balance and worksheet, before concluding with a section on the nature and importance of the chart of accounts.

Chapter 5 discusses internal control and the various ways in which accounting transactions are recorded in books of original entry, and then outlines the major elements of computerised accounting systems. Students should have a thorough grounding in the basic recording process as a result. Real-world examples in this chapter aim to prepare the student for a variety of ways in which the basic principles are applied in practice.

Chapters 6 and 7 concentrate on limited companies. Chapter 6 focuses on the main features associated with limited companies. Many users will have dealings with groups of companies so the requirements of group accounts are outlined. Chapter 7 explains the importance of company law, accounting standards, the stock exchange and the importance of good corporate governance. Corporate governance remains an ongoing issue for many businesses. The chapter then identifies the main requirements relating to the published annual report. It contains far more information on accounting standards than does the non-specialist book. It also introduces sections on segment reporting and creative accounting.

Chapter 8 focuses on the statement of cash flows and the importance of cash to any business. The chapter also completes the coverage of the main external reports prepared.

Chapter 9 introduces the areas of corporate social responsibility together with social and environmental accounting and also explains the current state of development of sustainability reporting and integrated reporting. Further work on these areas is likely to be needed over the foreseeable future as the world faces

ACCOUNTING FOR BUSINESS STUDENTSxvi

continued issues including climate change, a range of other environmental issues, peak oil, world poverty, child-labour abuse, and human rights and responsibilities generally.

Chapter 10 deals with the analysis and interpretation of the main financial statements. There is also more detail on ratios and prediction models than is included in the non-specialist book.

Our formal coverage of management accounting begins in Chapter 11 with a discussion of the interrelationships between costs, volume and profit in decision making. Extra material, compared with the non-specialist book, includes more on semi-variable costs, and the use of spreadsheets to develop profit profiles and associated charts.

Chapter 12 covers full costing and activity-based costing. Extra material, over and above that found in the non-specialist book, includes more on the apportionment process for overheads and cost-plus pricing.

Chapter 13 includes a section on planning and forecasting using the basic financial statements. This includes use of spreadsheets and sensitivity analysis. This is seen as an additional feature of planning and budgeting over and above that used in the non-specialist book. The remainder of the chapter focuses on short-term planning and control and deals with various aspects of budgeting. The chapter includes a section on Beyond Budgeting.

Chapter 14 deals with capital budgeting, the decision to invest in medium- and long-term assets, and considers how businesses appraise such projects. There is material on mutually exclusive projects and capital rationing, and more on practical aspects of identifying and dealing with cash flows, and the link with strategic planning.

Peter AtrillEddie McLaneyDavid Harvey

xviiABOUT THE CONTRIBUTOR

ABOUT THE CONTRIBUTOR

Maria Tyler: Chapter 5 contributor

Dr Maria Tyler is a certified practising accountant (CPA) and an accounting and finance lecturer (currently with CQUniversity’s School of Business & Law). She has more than 13 years’ tertiary teaching experience at undergraduate and postgraduate levels, and is experienced in curriculum design, development and implementation. Dr Tyler gained her PhD in Accounting from CQUniversity in Mackay, Queensland, and also holds a Bachelor of Business/Bachelor of Information Systems, Bachelor of Business with First Class Honours, MBA, Graduate Certificate in Management, Graduate Diploma in Management, and a Diploma in Financial Services (Conveyancing).

ACCOUNTING FOR BUSINESS STUDENTSxviii

We are indebted to the accounting education community for the time and expertise invested as proposal reviewers, digital reviewers, manuscript reviewers and focus-group participants. Their invaluable insights have greatly improved the clarity, consistency and focus of this textbook.

Dr Paul J. Blayney, University of SydneyDr Peta Stevenson-Clarke, RMITDr Angela Tan-Kantor, Swinburne University of TechnologyMs Dianne English, Griffith UniversityMaria Tyler, CQ-UniversityMr Chris Williams, RMITAmitav Saha, University of Notre Dame AustraliaDr Terri Trireksani, Murdoch UniversityWes Hamilton-Jessop, University of Sydney Abdul Razeed, University of SydneyOlga Gouveros, University of SydneyMatt Dyki, University of MelbourneNicholas McGuigan, Monash UniversityJodie Nelson, Griffith UniversityWarwick Baines, Charles Stuart UniversityMark Vallely, University of Southern QueenslandDavid Xiang, Edith Cowan UniversityYoungdeok Lim, University of New South WalesStephanie Perkiss, University of WollongongMarcus Rodrigs, Newcastle UniversityJulie Walker, University of QueenslandSamantha Sin, Macquarie UniversityMaurice Sheridan, RMIT

Special thanks from the authors and publisher to Angela Tan-Kantor for carrying out the technical editing for this edition.

COPYRIGHTASX material reproduced in this book is © ASX Corporate Governance Council Association of Superannuation Funds of Australia Ltd, ACN 002 786 290, Australian Council of Superannuation Investors, Australian Financial Markets Association Limited ACN 119 827 904, Australian Institute of Company Directors ACN 008 484 197, Australian Institute of Superannuation Trustees ACN 123 284 275, Australasian Investor Relations Association Limited ACN 095 554 153, Australian Shareholders’ Association Limited ACN 000 625 669, ASX Limited ABN 98 008 624 691 trading as Australian Securities Exchange, Business Council of Australia ACN 008 483 216, Chartered Accountants Australia and New Zealand, CPA Australia Ltd ACN 008 392 452, Financial Services Institute of Australasia ACN 066 027 389, Group of 100 Inc,

ACKNOWLEDGEMENTS

xixACKNOWLEDGEMENTS

The Institute of Actuaries of Australia ACN 000 423 656, ABN 50 084 642 571, The Institute of Internal Auditors – Australia ACN 001 797 557, Financial Services Council ACN 080 744 163, Governance Institute of Australia Ltd ACN 008 615 950, Law Council of Australia Limited ACN 005 260 622, National Institute of Accountants ACN 004 130 643, Property Council of Australia Limited ACN 008 474 422, Stockbrokers Association of Australia ACN 089 767 706. All rights reserved 2017.

AASB material © Commonwealth of Australia (2017). All legislation herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, s.182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing from the Commonwealth available from the Australian Accounting Standards Board. Requests in the first instance should be addressed to the National Director, Australian Accounting Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria, 8007.

ACCOUNTING FOR BUSINESS STUDENTSxx

◀ Learning objectivesThese are listed at the beginning of each chapter and explain the key concepts that you should understand after studying the chapter. They are restated in the chapter, so you know where these objectives are covered. End-of-chapter questions are also keyed to the objectives.

Key term definitions ▶To help you understand key accounting

terminology and concepts, definitions are presented in the margin. All these terms are

also in the glossary at the end of the book for easy reference.

◀ Concept check questionsShort multiple-choice questions which aim to provide you with a quick check of your understanding of the learning objective.

Accounting and You boxes ▶This feature appears in each chapter to help

you see the relevance of accounting concepts to your everyday life. Following each of these are a

series of class discussion points.

◀ In-chapter activitiesThese are designed to test your comprehension of the material you have just read, as well as to make links to topics already covered or still to be covered. Answers to the activities are provided at the end of each chapter.

Real World examples ▶Integrated throughout the text, these illustrative

examples highlight the practical application of accounting concepts and techniques by real businesses,

including extracts from published financial reports, articles from the media, survey data and other

interesting insights from business. These examples are followed by a series of class discussion points. Students

may need to go back to the original examples and beyond, but the points are intended to provoke some

critical thinking by the students.

FOR STUDENTS: HOW DO I USE THIS BOOK?

C H A P T E R 1

INTRODUCTION TO ACCOUNTING

People need economic information to help them make decisions and judgements about businesses. Whether we are talking about a business manager making decisions about the most appropriate level of production, a bank manager responding to a request from the business for a bank loan or trade unionists deciding how much pay increase to seek for their members, accounting information should help them with their decision.

In this opening chapter, we begin by considering the roles of accounting. As we shall see, accounting can be a valuable tool in the decision-making, planning and control process. We shall identify those people who are the main users of accounting and fi nancial information, and discuss the ways in which this information can improve the quality of decisions that they make. In subsequent chapters, we develop this decision-making theme by considering in some detail the kinds of fi nancial reports and methods used to aid decision-making.

LEARNING OBJECTIVESWhen you have completed your study of this chapter, you should be able to:

LO1 Explain the nature and role of accounting

LO2 List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information

LO3 Compare and contrast � nancial and management accounting

LO4 Identify the main purpose of a business (while recognising a range of other in� uences), and explain the traditional risk–return relationship

LO5 Provide an overview of the main � nancial reports prepared by a business

LO6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context

LO7 Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting, including current thinking on ethics in business

LO8 Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting

LO9 Identify the learning outcomes associated with the Australian Learning and Teaching Council’s Academic Standards Statement for Accounting: namely judgement; knowledge; application skills; communication and teamwork; and self-management; and examine how these compare with characteristics of successful business people.

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Chapter 8 MEASURING AND REPORTING CASH FLOWS 379

As we have seen in earlier chapters, organisations that are more complicated than simple clubs have to produce statements that reflect movements in wealth and the net increase (profit) or decrease (loss) for the period concerned.

The statement of cash flows is a fairly late addition to the annual published financial statements. At one time, companies were only required to publish an income statement and a statement of financial position. It seems the prevailing view was that all the financial information needed by users would be contained within these two statements. This view may have been based partly on the assumption that, if a business were profitable, it would also have plenty of cash. While in the long run this is likely to be true, it is not necessarily true in the short to medium term. In practice, unless a business’s cash flows are monitored in the short to medium term, there may not be a long term for that business.

We saw in Chapter 3 that the income statement sets out the revenue and expenses for the period, rather than the cash inflows and outflows. This means that the profit (or loss), which represents the difference between the revenue and expenses for the period, may have little or no relation to the cash generated for the period.

To illustrate this point, let us take the example of a business making a sale (generating revenue). This may well lead to an increase in wealth that will be reflected in the income statement. However, if the sale is made on credit, no cash changes hands—at least, not at the time of the sale. Instead, the increase in wealth is reflected in another asset: an increase in trade receivables. Furthermore, if an item of inventory is the subject of the sale, wealth is lost to the business through the reduction in inventories. This means that an expense is incurred in making the sale, which will also be shown in the income statement. Once again, however, no cash changes hands at the time of sale. For such reasons, the profit and the cash generated during a period rarely go hand in hand.

Activity 8.1 helps to underline how particular transactions and events can affect profit and cash for a period differently.

ACTIVITY 8.1The following is a list of business/accounting events. In each case, state the effect (i.e. increase, decrease or no effect) on both cash and profit.

EffectEvent On profit On cashRepayment of a loan .......... ..........Making a sale on credit .......... ..........Buying a non-current asset for cash .......... ..........Depreciating a non-current asset .......... ..........Receiving cash from accounts receivable .......... ..........Buying some inventory for cash .......... ..........Making a share issue for cash .......... ..........

.......... ..........

From what we have seen so far, it is clear that the income statement is not the place to look if we are to gain insights about cash movements over time. We need a separate financial statement.

In 1991, a new accounting standard required entities to produce and publish, as well as the income statement and the balance sheet, a cash flow statement reflecting movements in cash. The reason for this was the growing belief that, despite their usefulness, the income statement and the balance sheet did not concentrate sufficiently on liquidity. It was believed that the ‘accrual-based’ nature of the income statement tended to obscure the question of how and where a company was generating the cash it needed to continue its operations. The standard has been updated several times and the title of the statement has subsequently been changed to ‘statement of cash flows’.

Why is cash so important to businesses pursuing profit/wealth? The solution to Activity 8.1 illustrates the fact that cash and profit do not go hand in hand, so why the current preoccupation

M08_ATRI6570_01_SE_C08.indd 379 31/08/17 5:56 PM

ACCOUNTING FOR BUSINESS STUDENTS76

It is frequently useful for individuals to assess just what they have achieved and what they are ‘worth’. If you need to do this for purposes of obtaining a car loan, or a mortgage, you will probably find that your bank will only include assets and liabilities using the kind of approach adopted in this chapter. Yet you will probably be able to think of a number of things that you value (and others value) which your banker says are nice, but not relevant. What they mean is that they are not relevant to them. But they may well be extremely valuable to you. Your (or your parents’) investment in your education has undoubted value to you, and to prospective employers, but would not satisfy the accounting definition of an asset. Your superannuation balance is certainly of worth, but may well be so far ahead in terms of your ability to access it, that it is of no consequence in terms of current decision-making. Your collection of old model trains also has considerable worth, but obtaining a figure which can be accepted by everyone may well be difficult, if not impossible.

You need to understand that the statement of financial position aims to provide a list of assets and liabilities which has a high degree of objectivity, such that almost anyone looking at a particular business or individual would come to the same conclusion, because all would be following the same rules. Our discussion about the value of brands, of soccer players and other ‘human’ assets was not intended to imply that these have no value, but that it is difficult to obtain agreement about their value. When making decisions about value, all users of accounting information have to make assumptions or judgements about the value of the assets controlled by a business. In your own life, you will need to make the same kind of judgements about worth. When looking at figures in a statement of financial position, you should be trying to ascertain the underlying values, in terms of individual assets and composite groups of assets or businesses. You also need to do this with your life. Accounting figures can be helpful, but they simply cannot make individual judgements in the way that you can and need to do.

Class discussion points1 Do you consider that knowledge as to how the accounting systems work is necessary for managers?

2 Can you think of ways in which this knowledge might be useful to you, assuming that you are operating as a manager in a business, not as an accountant?

3 If you were to develop your own business, you would be likely to do so partly for financial reasons, but also for reasons to do with factors such as flexibility, job satisfaction, etc. What kind of factors might you include in your own personal list of assets, or benefits, associated with running your own business, which would not normally be included in the business balance sheet, and how important are these likely to be to you? Would this list reduce the importance of the balance sheet?

ACCOUNTING AND YOU

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CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY ACCOUNTING 435

terms, to its shareholders the choice of a more expensive production process that will yield lower pollution levels but also lower profits? If a competitor goes down the lower-cost, higher-pollution route, it will probably be able to sell at a lower price and threaten that competitor’s position. There are clearly some inherent conflicts in this area.

ACTIVITY 9.4Can you think of reasons why a business might still pursue activities that are less profitable but socially beneficial?

So how might business as a whole be encouraged to engage in more socially responsible behaviour? There are several possibilities:

• Make shirking of responsibilities more costly, by regulation and law and public awareness.• Market the good citizen concept (e.g. the growth of ‘green’ consumerism), where consumers’

decisions are strongly influenced by the nature of the business, product or production method.• Combine businesses into groups to develop ways of dealing with aspects of their business in a

socially responsible way.• Promote government action, which might include legislation, penalties for non-compliance or

subsidies.

Concept check 1

Which of the following statements is false?

A Business today cannot solely focus on wealth maximisation.B Social and environmental issues should be given serious consideration by today’s businesses.C Today’s business managers must consider a much broader range of issues than in the past.D Businesses today unanimously accept sustainability as their primary goal.E All of the above are true.

Concept check 2

Which of the following statements is true?

A Some stakeholders have legitimate interests in all parts of a business.B Some stakeholders have legitimate interests in only a certain part of a business.C Environmentalists are seen as a relatively new stakeholder in business.D Potential customers should be considered as stakeholders.E All of the above.

Concept check 3

The stakeholder concept recognises a number of parties with a legitimate interest or stake in business. These stakeholder groups include:

A Owners/shareholders and managersB Employees and customersC Government, lenders and suppliersD Investment analystsE All of the above.

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CHAPTER 2 MEASURING AND REPORTING FINANCIAL POSITION 47

NATURE AND PURPOSE OF THE STATEMENT OF FINANCIAL POSITION

The purpose of the statement of financial position is to set out the financial position of a business at a particular point in time. It is also referred to as a ‘balance sheet’. Both terms have been used in recent years. The current recommendation is that the term ‘statement of financial position’ is to be used. This statement represents a summary of information provided in the accounts, and is effectively a listing of the balances in all of the detailed accounts—this is where the term ‘balance sheet’ comes from. The statement of financial position sets out the assets of the business on the one hand, and the claims against it on the other. Before looking at the statement in more detail, we need to be clear what these terms mean.

AssetsAn asset, for accounting purposes, is essentially a business resource that has certain characteristics. The main characteristics of an asset are:

• A probable future economic benefit. This simply means that the item is expected to have some future monetary value, which can arise through its use in the business or through its hire or sale. Thus, an obsolete piece of equipment that can be sold for scrap would still be considered an asset, whereas an obsolete piece of equipment that could not be sold for scrap would not be regarded as an asset.

• The business has an exclusive right to control the benefit. Unless the business has exclusive rights over the resource, it cannot be regarded as an asset of the business. Thus, for a business offering holidays on barges or houseboats, a canal and river system is a very valuable resource. However, as the business cannot control others’ access to the system, it cannot be regarded as an asset of the business (but its barges and houseboats would count as assets).

• The benefit must arise from some past transaction or event. This means the transaction (or other event) giving rise to the business’s right to the benefit must have already occurred and will not arise at some future date. Thus, if a business agrees to purchase a piece of machinery at some future date, this does not make the item one of its assets at this point in time.

• The asset must be capable of reliable measurement in monetary terms. Unless the item can be measured in monetary terms with a reasonable degree of reliability, the item will not be included as an asset on the statement of financial position. For example, customer loyalty may be valuable to the business but impossible to quantify. Similarly, the title of a magazine (e.g. New Idea or Wheels) that was created by its publisher may be extremely valuable to that publishing business, but this value is usually difficult to quantify. It will not therefore be treated as an asset.

Note that all four of these conditions must apply. If one of them is missing, the item will not be treated as an asset for accounting purposes, and will not, therefore, appear on the statement of financial position. Figure 2.1 summarises the above discussion in the form of a decision chart.

We can see that these conditions will strictly limit the kind of items that may be referred to as ‘assets’ in the statement of financial position. Certainly not all resources exploited by a business will be assets of the business for accounting purposes. Some, like the canal system or the magazine title Wheels, may well be assets in a broader sense, but not for accounting purposes. Once an asset has been acquired by a business, it will continue to be considered an asset until the benefits are exhausted or the business disposes of it in some way.

Examples of items that often appear as assets in a business statement of financial position include: freehold premises; machinery and equipment; fixtures and fittings; patents and trademarks; accounts receivable; investments; cash; and inventories.

Note that an asset does not have to be a physical item—it may also be a non-physical right to certain benefits. Assets that have a real physical substance are referred to as tangible assets (e.g. inventory, plant and equipment). Assets that have no physical substance but still represent potential benefits are referred to as intangible assets (e.g. copyright, trademark, patent, franchise, goodwill).

LO1

Explain the nature and purpose of the statement of financial position

(balance sheet) and its component parts

assetA resource held by a business which has certain characteristics.

tangible assetsThose assets that have a physical substance (e.g. plant and machinery, motor vehicles).

intangible assetsAssets which, while providing expected future benefits, have no physical substance (e.g. copyrights, patents).

M02_ATRI6570_01_SE_C02.indd 47 31/08/17 8:36 PM

Chapter 13 PLANNING AND BUDGETING 639

For appropriations, the implications of tax planning need to be recognised. Preference dividends should be easy. Ordinary dividends seldom reduce in practice, so any assumptions or estimates about these are likely to be seriously constrained.

Real World 13.1 indicates just how BHP described the approximate impact of the principal factors that aff ected earnings before interest and tax (EBIT) over a period: this is not based on forecasts but on actual performance. The analysis used, however, is quite similar to the kind used to date in forecasting the income statement.

For the statement of fi nancial position, assumptions and estimates include the following:

• Non-current assets—future acquisition and disposal of assets (including proceeds of disposal) and depreciation policies.

• Working capital—what kind of period of credit will be allowed to (and taken by) customers (accounts receivable), how quickly suppliers (accounts payable) will be paid, what levels of inventory will be targeted. The potential impact on profi ts and cash fl ow made by poor working capital management is considerable.

• Loans, raised or repaid.• Capital—new capital raised (infrequently) and the amount or proportion of profi ts that is

retained.

Most of the assumptions and estimates identifi ed to date relate to the statement of cash fl ows and include the following:

• profi t• depreciation adjustments/asset disposals• acquisitions of non-current assets• levels of working capital

In its 2016 Annual Report BHP provided a table describing the impact of the principal factors that a� ected underlying EBITDA for 2016 (see page 73 of the report).

What is interesting in the context of this chapter are the items included in the table, particularly the following, as they relate to the ideas discussed in the chapter to date:

Changes in sales pricesPrice-linked costsGiving Net price impactProductivity volumesGrowth volumesGiving Changes in volumesOperating cash costsExploration and business developmentGiving Changes in controllable cash costsExchange ratesInfl ation on costsFuel and energyNon-cash

One-o� itemsGiving Changes in other costs.

Source: BHP Billiton Annual Report 2016, p 73. BHP Billiton.

Classroom discussion points1 Access page 73 of the 2016 Annual Report:

(a) Identify the most signifi cant factors aff ecting underlying EBITDA for the fi nancial year ending 30 June 2016.

(b) Which are the more signifi cant—changes in sales price or changes in price-linked costs?

(c) Comment on the changes in volume.

(d) Comment on the changes in controllable cash costs.

(e) Discuss the changes in other costs.

2 How useful do you think an analysis of this type is?

3 What does an analysis of this type by a huge organisation teach you about the use of the fi nancial accounting framework in assisting planning?

REAL WORLD 13.1Analysis of principal factors impacting EBIT

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xxi

323Chapter 6 INTRODUCTION TO LIMITED COMPANIES

SOLUTIONS TO ACTIVITIES

ACTIVITY 6.1

Business is a risky venture—in some cases very risky. People will usually be happier to invest money when they know the limit of their liability. If investors are given limited liability, new businesses are more likely to be formed and existing ones are likely to fi nd it easier to raise more fi nance. This is good for the private-sector economy and may ultimately lead to the generation of greater wealth for society as a whole.

Obviously not all suppliers of goods and services are protected, as we read regularly that they lose all or part of what is owed to them when companies are liquidated (e.g. Harris Scarfe, Ansett, HIH). However, certain factors, requirements or actions are in place to provide protection, including:

• the legal requirement for companies to prepare fi nancial reports in conformity with statutory accounting standards• suppliers may require payment to be made in advance• creditors may require personal guarantees by the owners or management• lenders may take out a specifi c claim against tangible assets of the company (mortgage, bill of sale)• lending agreements may restrict the fi nancial practices:

—maximum level of debt to assets—minimum required return on assets—limitations on profi t distributions—restrictions on asset sales—specifi cation of accounting methods that can be used

• the creditors rank before the shareholders in the distribution of assets in the event of a liquidation of the company.

ACTIVITY 6.2

Two ways are commonly used in practice:

• The shareholders may insist on monitoring closely the actions of the directors and the way in which they use the resources of the company.

• The shareholders may introduce incentive plans for directors that link their pay to the share performance of the company. In this way, the interests of the directors and shareholders will become more closely aligned.

ACTIVITY 6.3

The answers are as follows:

Net assetsCash $100,000Shareholders’ equityShare capital (100,000 ordinary shares issued at $2—called to $1) $100,000

Net assetsCash $150,000Shareholders’ equityShare capital (100,000 ordinary shares issued at $2—called to $1.50) $150,000

CC1 ECC2 ACC3 CCC4 D

CC5 A You might have been tempted with B, but accounting reserves are never in cash

CC6 DCC7 CCC8 DCC9 ECC10 C

CC11 DCC12 E

Concept check answers

M06_ATRI6570_01_SE_C06.indd 323 31/08/17 5:24 PM


Concept check 9

Which of the following statements about profi t–volume charts are true?

A Profi t–volume charts provide more information than break-even charts.B The slope of the profi t line is the same as the slope of the revenue line on the

break-even chart.C The slope of the profi t line is the same as the slope of the total cost line on the

break-even chart.D None are true. All are false.

ACTIVITY 11.6A company has existing monthly sales of $350,000 and a contribution margin of 0.15 (15%). A new product is introduced at a discounted price in an endeavour to boost custom. The new product is expected to generate sales of $18,000 per month at a negative contribution of $3,000, increase fi xed costs by $7,000 per month, but boost sales of existing products by 12%.

Compute the overall change (profi t/loss) for the subsequent month.

SELF-ASSESSMENT QUESTION 11.1

The following information concerns a business for the past three months:

$Sales 15,000 units @ $20 300,000Variable costs 15,000 units @ $12 180,000Contribution 120,000Fixed costs 150,000Loss 30,000

The managers of the business are now considering what to do about this loss. They hope to make a profi t of $30,000 in the next three months, and the following proposals have been made:

1 launch an advertising campaign costing $50,0002 reduce selling price to $193 reduce variable costs by $1.50 per unit by installing more effi cient equipment, which will increase fi xed costs by

$40,000.

You have been asked to advise on:

(a) the level of sales needed to make a profi t of $30,000 assuming that none of the three proposals is adopted(b) the break-even point under this assumption(c) the level of sales needed, for each of these proposals, to generate the required profi t(d) the impact each proposal will have on the break-even point.

Assume that revenues and costs will remain the same in the next three months, other than those for the three proposals.

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CHAPTER 2 MEASURING AND REPORTING FINANCIAL POSITION 77

SUMMARYIn this chapter we have achieved the following objectives in the way shown.

OBJECTIVE METHOD ACHIEVED

LO1: Explain the nature and purpose of the statement of financial position and its component parts

• Identified the purpose as being to set out the financial position of a business at a particular point of time

• Explained that the statement included assets and claims, which consisted of external liabilities and owners’ equity

• Identified and analysed the nature of assets• Identified and analysed the nature of liabilities• Identified and analysed the nature of owners’ equity• Used the accounting equation to illustrate the build-up of a

statement of financial position, covering a range of transactions including trading transactions

LO2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period

• Explained the accounting equation• Illustrated by use of a practical example• Worked through an additional activity to enable us to prepare a

statement of financial position after a series of transactions

LO3: Classify assets and claims • Identified the most common classification of assets being based on the timing of receipts of benefits of ownership (e.g. current, non-current)

• Identified the current/non-current classification as being appropriate for liabilities

• Explained the difference between the various components of equity

LO4: Apply the different possible formats for the statement of financial position

• Illustrated the main format of the statement of financial position• Examined the following formats:

• horizontal (T account)• vertical (narrative)

• Differentiated between the entity approach and the proprietary approach

• Identified the basic equation as:

• proprietary:

OE 5 A – L• entity:

A 5 L 1 OE

LO5: Identify the main factors that influence the content and values in a statement of financial position

Identified and analysed the following factors:• conventional accounting practice• business entity• historic cost• prudence• going concern• dual aspect• money measurement, including consideration of goodwill and brands

and human resources• stable monetary unit• valuation of assets

LO6: Identify the main ways in which the statement of financial position can be useful for users of accounting information

Identified the ways in which the statement of financial position can provide useful insights into:• how the business is financed and how funds are deployed• the liquidity (ability to meet short-term obligations) of the business• the value of the business• the relationship between assets and claims• the asset mix (productive or unproductive) of the business• business performance

M02_ATRI6570_01_SE_C02.indd 77 31/08/17 8:36 PM

◀ In-chapter self-assessment questionsMore demanding and comprehensive than the activities, these challenge you to put into practice your understanding of key concepts. The self-assessment question solutions are available online at www.pearson.com.au/9781488616570.

Solutions to activities and concept checks ▶These allow you to check your answers to the

in-chapter activities.

◀ SummaryAt the end of every chapter, the summary correlates learning objectives with the method used to achieve them. Use this as a great revision tool.

End-of-chapter questions and problems ▶These help reinforce your understanding of

chapter content. All questions are keyed to their corresponding learning objectives so you can pick

and choose the areas you want to work on. The questions are divided into level of difficulty—

easy, intermediate and challenging. They include:• discussion questions to help you assess

your recall of the main principles covered in each chapter

• application exercises to help you apply and consolidate your understanding of accounting in practice.

◀ Case studiesThese give you real-world examples of accounting in practice and encourage you to think critically about accounting issues and controversies.

Glossary ▶This quick reference guide at the end of the

book helps jog your memory for all those important accounting terms and concepts.

AABC system of inventories control A method of applying different levels of inventories control, based on the value of each category of inventories.absorption costing A method of costing in which a ‘fair share’ of manufacturing/service provision overhead is included when calculating the cost of a particular product or service.accelerated depreciation An approach to the calculation of depreciation expense which results in depreciation expenses being higher in the early years of an asset’s life than in later years.accelerated rights issues Rights issues of this type are structured in two phases, with an initial (accelerated) issue to institutional investors (who will pay quickly), followed by a (non-accelerated) issue to the retail (non-institutional) component of the shareholders.accounting The process of identifying, measuring and communicating information to permit informed judgements and decisions by users of the information.accounting rate of return (ARR) The average accounting profi t from an investment, expressed as a percentage of the average investment made.accounting standards Rules established by the professional or statutory accounting bodies, which should be followed by preparers of the annual accounts of companies.accruals accounting The system of accounting that adheres to the accruals convention. This system is followed in preparing the statement of fi nancial position and the income statement.accruals convention A convention which asserts that profi t is the excess of revenue over expenses for a period, not the excess of cash received over cash paid.accrued expenses Expenses which are outstanding at the end of the accounting period.acid test ratio A liquidity ratio that relates the liquid assets (usually defi ned as current assets less inventories and prepayments) to the current liabilities.activity-based costing (ABC) A technique for more accurately relating overheads to specifi c production or provision of a service. It is based on acceptance of the fact that overheads do not just occur: they are caused by activities, such as holding products in stores, which ‘drive’ the costs.adverse variance A difference between planned and actual performance, where the difference will cause the actual profi t to be lower than the budgeted one.ageing schedule of accounts receivable A report dividing accounts receivable into categories, depending on the length of time outstanding.amortisation The writing-down of an asset—usually an intangible asset—as its benefi t is used up; the equivalent of depreciation for a non-current asset.asset A resource held by a business which has certain characteristics.associate company A company which is partly owned by another company, such that the ownership does not give the

investor company control, but does give it the opportunity to exert considerable infl uence. Typically, the ownership is between 20% and 50%.

audit A process in which a range of activities are checked to ensure that the activities have been completed in accordance with a set of rules or guidelines.

audit trail A step-by-step record by which accounting data can be traced back to their source.

auditors Professionals whose main duty is to make a report as to whether, in their opinion, the accounting statements of a company do what they are supposed to do; namely, to show a true and fair view, and comply with statutory and accounting standard requirements.

Australian Accounting Standards Board (AASB) Australian body responsible for developing accounting standards for application to Australian entities.

Australian Securities and Investments Commission (ASIC) The government body responsible for regulating companies, company borrowings, and investment advisers and dealers.

average inventories turnover period ratio An effi ciency ratio that measures the average period for which inventories are held by a business.

average settlement period for accounts payable ratio An effi ciency ratio that measures the average time taken for a business to pay its trade payables.

average settlement period for accounts receivable ratio An effi ciency ratio that measures the average time taken for trade receivables to pay the amounts owing.

Bbad debts Amounts owed to the business that are considered to be irrecoverable.

balance sheet A statement that shows the assets of a business and the claims on the business. Assets must always equal claims. Claims will relate to external liabilities and owner’s claims (known as equity).

balanced scorecard Both a management system and a system for measuring and reporting performance, which includes information relating to fi nancial aspects of the business, business processes, customers, and learning and growth, thus giving a more comprehensive (and strategic) view of the business.

bank overdraft A fl exible form of borrowing that allows an individual or business to have a negative current account balance.

batch costing A technique for identifying full cost, where the production of many types of goods and services, particularly goods, involves producing a batch of identical or nearly identical units of output, but where each batch is distinctly different from other batches.

board of directors The team of people chosen by the shareholders to manage a company on their behalf.

bonds See loan stock/notes.

GLOSSARY

Z01_ATRI6570_01_SE_GLOS.indd 759 28/08/17 7:17 AM

463CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY ACCOUNTING

Gray, R., Owen, D. & Adams, C. 1996, Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Reporting, Prentice Hall, London.

Guthrie, J. & Parker, L.D. 1990, ‘Corporate social disclosure practice: a comparative international analysis’, Advances in Public Interest Accounting, vol. 3, pp. 159–76.

Holme, R. & Watts, P. 2000, Corporate Social Responsibility: Making Good Business Sense, World Business Council for Sustainable Development, UK, January.

International Integrated Reporting Council 2013, The International Framework, December.

KPMG Global Sustainability Services 2002, KPMG International Corporate Sustainability Reporting, KPMG, Amsterdam.

Trotman, K.T. 1979, ‘Social responsibility disclosures by Australian companies’, The Chartered Accountant in Australia, March, pp. 24–28.

Trotman, K.T. & Bradley, G.W. 1981, ‘Associations between social responsibility disclosures and characteristics of companies’, Accounting, Organisations and Society, pp. 355–62.

DISCUSSION QUESTIONSEASY

9.1 LO1 Corporate social responsibility (CSR) reporting extends the traditional financial reporting into new areas. Describe three of these new areas.

9.2 LO2 What is meant by ‘corporate social responsibility’?

9.3 LO1–3 At a personal level, articulate your views on ethical governance. In the course of this, examine your views on the extent to which the search for wealth should be limited by moral values or social conscience.

9.4 LO3 Describe in detail the Australian Accounting Standards for corporate social responsibility (CSR) accounting.

9.5 LO4 List the three components of triple bottom line reporting. Which component is currently accommodated by financial accounting reporting standards? With what measure?

9.6 LO5 What does ‘GRI’ stand for? What’s one word to describe what it’s all about? Who is it meant to benefit?

9.7 LO6 List the four perspectives used with the balanced scorecard approach.

INTERMEDIATE

9.8 LO1/2 Can you think of any current issues relating to businesses or industries in your area where business interests, social needs and environmental consequences are in conflict? How might you attempt to balance these conflicts in both the short term and the long term?

9.9 LO2 Why might we expect a voluntary CSR policy to work?

9.10 LO2 Just how much responsibility should an organisation take for social and environmental issues?

9.11 LO1–3 Assume that you are the CEO of a company that is the major employer in a small town in rural New South Wales. What responsibility would you have for your employees? Would your company size affect your decision?

9.12 LO1–3 Is there any evidence that companies that are socially responsible, in terms of pollution and waste avoidance, benefit in terms of profits?

9.13 LO1–3 To what extent are social and environmental concerns consistent with a shareholder wealth maximisation objective?

9.14 LO1–3 How well equipped is the typical business person to understand the full range of issues covered by a full-scale sustainability report?

9.15 LO1 Why CSR? Don’t accountants have enough to do with their preparation of the traditional financial statements?

9.16 LO2 Discuss the potential for practical application of the Ceres Principles. Describe potential roadblocks to the use of these principles as a practical guide.

9.17 LO6 How is the balanced scorecard approach similar to the GRI?

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The management of Enviro Ltd is planning a fairly signifi cant expansion policy for the forthcoming year (2018). You have been asked to look at the fi nancial implications of its plans. You have asked for a clear identifi cation of the underlying assumptions and estimates, and these are given below.

Market positionThe total estimated market for 2017 is $600 million.

Sales during 2017 are expected to be around $30 million. However, the business is looking to achieve an improved market share (currently 5%) in 2018 due to more aggressive marketing. A 25% increase in sales volume is expected. Given product price elasticity, prices will need to be maintained at the 2017 levels in order to achieve the planned volumes.

Economic environmentThe current rate of infl ation is 4% and this rate is likely to continue through 2018. The business thinks that this refl ects a reasonably close estimate of its specifi c cost infl ation and is happy to proceed on this assumption.

Tax is expected to be charged at 30%.

Dividend policyThe dividends to be recommended for 2017 total $1 million. The business would like to increase this to $1.25 million to cover infl ation and to share in the hoped for increase in profi tability.

Financial structure of the companyShare capital amounts to $10 million at the end of 2017, with reserves amounting to $2.5 million.

Care has been taken with regard to working capital management, and the business plans to maintain its working capital in the following proportions through both 2017 and 2018:

Inventory 10% of sales for the yearAccounts receivable One-sixth of sales for the

year (i.e. a two-month credit period)

Cash 3% of sales for the yearAccounts payable One-twel� h of sales for

the year (i.e. a one-month credit period)d)

Other current liabilities at the end of 2017 are esti-mated to be dividends and tax of $900,000.

Variable costs in 2017 are expected to be 60% of sales.

Fixed costs for 2017 are expected to be $9 million, including $1 million for depreciation.

An extra amount of approximately $1 million will be spent on advertising in 2018 in order to capture the increased market share.

Capital expenditure/non-current assetsThe company currently has non-current assets which had cost $12 million, with an associated aggregate depreciation which is expected to amount to $4 million at the end of 2017. Depreciation is 10% straight line.

In order to support the expansion, new equipment will need to be purchased at a cost of $4 million. This is planned to occur at the start of 2018. Depreciation on this will also be at 10% straight line. Some existing assets will be sold for $60,000. These had originally cost $400,000 and had been depreciated to date by $300,000.

CHAPTER 8 CASE STUDY

QUESTIONS1 Explain why preparation of a set of projected fi nancial statements might be useful.

2 Make the necessary computations to refl ect the plans outlined above, clearly stating any assumptions.

3 Comment on the feasibility of the plans, and suggest any courses of action that management might take.

4 Evaluate the use of the projected fi nancial statements in terms of effi ciency of planning and decision-making in the context of this particular business.

5 State what advantages there might be in using spreadsheets to prepare statements of this type.

6 Sensitivity analysis is an analysis in which variables in a decision are changed one at a time, with the view to identifying which variables are most important to the success of the decision, plan or project. In what ways might an analysis of this type improve your decision-making ability? What kind of variables might you examine critically?

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FOR STUDENTS

ACCOUNTING FOR BUSINESS STUDENTSxxii

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Solutions to the self-assessment questions are available at www.pearson.com.au/ 9781488616570.

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Solutions ManualThe Solutions Manual provides educators with detailed, accuracy-verified solutions to in-chapter and end-of-chapter problems in the book.

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